Variations on
Tax Reform
(from Maine Townsman,
December 2002)
by Geoffrey
Herman, Director of State & Federal Relations, MMA
Like the smell of fried dough at an agricultural fair, tax reform permeates the political air in Augusta. Citizen initiatives, multi-faceted legislative proposals, and proposed constitutional amendments swirl around through newspaper accounts and the politically-oriented radio and television talk show circuits in dizzying confusion. It has become impossible to believe that anything but meaningful property tax relief and the stabilization of state revenues through comprehensive tax reform will bring closure to this tax policy frenzy.
But what tax reform proposals are actually on the table? What are their similarities? How do they differ? If enacted or adopted, how would they impact state and local government and Maine’s public school system? What are the next steps? How will the Legislature sort out all these proposals? Should they be combined or reconciled somehow? Is any combination or reconciliation of the various proposals a procedural possibility? These are the questions this article will attempt to address.
MMA’s State and Federal Relations staff are aware of six major proposals that fit more or less squarely in the category of comprehensive tax reform, and a seventh that would fundamentally change the way property taxes are assessed. Three of those proposals are in circulation as citizen-initiated legislation, which typically is decided at referendum. The remaining four tax reform measures will likely be introduced to the Legislature in 2003 in the more traditional way, but at least three of those packages involve proposed changes to Maine’s Constitution, which are also decided at referendum.
The odds, therefore, are nearly perfect that the final arbiter of tax reform will be the voters of Maine rather than the Legislature, but it gets more complicated than that. Because of the great number and wide variety of reform proposals that will be before the Legislature this upcoming session, and because several will be initiated by petition, the voters of Maine are guaranteed that a menu of tax reform options will greet them in the polling booth on November 4, 2003, rather than a simple up-or-down vote on a consolidated package.
The menu is found in the side-by-side summary of the several proposals at the centerfold of this magazine. The summary attempts to identify the major moving parts in each of the proposals for comparison purposes. What follows is a broad overview description of each proposal, who was behind its development, and how the proposal is similar to, and different from, the other entrees on the menu.
The MMA Proposal. Much has been written in several previous editions of the Maine Townsman about the tax reform proposal initiated by MMA’s Legislative Policy Committee and Executive Committee, and circulated as a citizen initiative on the November 5 election day. Little space needs to be devoted to it here.
In summary, the municipalities have been pushing for comprehensive tax reform since the aftermath of the 1991 recession, and the proposal was developed as a result of municipal frustration with the Legislature’s inability or unwillingness to tackle a comprehensive modernization of Maine’s tax code, with property tax relief and state revenue stability as central goals. It is a two-page proposal, half of which is actual change to Maine law and half of which is directive language to empower the Legislature to accomplish tax reform and directly manage Maine’s overall tax burden.
The specific changes to law would be a requirement that the Legislature actually provide from state resources 55% of the total cost of public elementary and secondary education. The 55% requirement is a long-standing, unmet legislative “intention” (or “promise”) that, if fulfilled by the State, would shift $200 million of educational costs from the property tax obligation to a State obligation, with its broad-based tax sources. The other change to the law is the creation of two parallel funds that set aside 2% of state educational subsidy and 2% of municipal revenue sharing for the purpose of targeting these resources to the schools and municipalities that are willing to change their policies, program delivery or governance structure in a way that creates sustained cost savings in the delivery of educational or local services.
The major difference between this proposal and all the others is that the legal centerpiece of the initiative is a change in education funding, not the tax code. The proposal leaves to the Legislature the taxation changes necessary to meet the State’s long-neglected school funding obligation. It is, after all, the Legislature’s responsibility to pay its appropriate share of education, and it is the public and deliberative legislative process where the detailed changes to Maine’s tax code should be developed and adopted. Another major difference is that the $200 million fiscal impact of this proposal is much more moderate in scope than the other initiatives in circulation.
“California’s Proposition 13 (Palesky).” For at least the last eight years, Carol Palesky of Topsham has been a crusader for the initiative adopted by California voters in 1979, often referred to as “Proposition 13.” Palesky, who heads up the Maine Taxpayers Action Network, has launched several petition drives over the years to get this proposal before the voters, but as of yet has failed to gather enough signatures during each petition drive to obtain the necessary certification from the Secretary of State. This year appears to be different. More organized, perhaps, than in the past, and feeding off ever-increasing concerns about the property tax burden, Palesky says that she now has a sufficient number of signatures to pass the Secretary of State’s scrutiny, and is continuing to gather more signatures to ensure an adequate cushion.
The Proposition 13 initiative is five pages of new law that effects two major changes to Maine’s property tax code. First, it would cap any municipality’s equalized property tax rate at 10 mills. The current average mill rate in Maine is approximately 17 mills. Second, it would establish the assessed value of all property at its (equalized) 1997 level, restricting annual increases to either the inflation factor (Consumer Price Index) or 2%, whichever is less. This second element of the Proposition 13 initiative is entirely inconsistent with Maine’s Constitution, which requires all property to be assessed at its “just value”.
By slashing municipal property tax revenue nearly in half, the Proposition 13 proposal has the largest financial impact of any of the plans on the table. In terms of financial impact and structural revenue restriction, its only rival is the “Colorado” initiative.
Colorado. Colorado’s state constitution is riddled with initiatives, and a “Taxpayer’s Bill of Rights” was adopted in that state in 1992 which more-or-less effectively created a constitutional governance system of supermajority voting and referendum ratification designed to restrict increases in state and local taxes. The initiative attracted the attention of a Maine group that organized as the Citizens for a Strong Maine Economy, and that group is now gathering signatures to advance a Colorado-style initiative into the tax reform arena. The specific plan goes well beyond the Colorado model by employing the “belt and suspenders” approach of simultaneously cutting state revenues and implementing the state and local tax caps.
Relatively long and complicated for a citizen initiative, this proposal is written out in 16 pages of new law that has three major moving parts. Income tax rates would be cut 20% over a 5-year period. The property tax homestead exemption would be increased from $7,000 in value to $50,000 in value over that same period, and converted to a tax rebate program rather than an up-front exemption. And state and local governments would be limited to inflation-based increases from one year to the next unless tax or expenditure increases are specially approved by supermajority margins, backed up by a referendum validation.
In scope the Colorado initiative would drain almost as much money each year out of the state treasury that the Proposition 13 initiative strips out of the municipalities. The tax capping system in the Colorado initiative is more extensive, however, restricting growth in the state budget in addition to school and municipal budgets.
Chebeague. A group of people from Chebeague Island (Cumberland) and the town of Harpswell have put together a proposal designed to blunt the impact of property tax increases that are the product of the spiking value of land adjacent to the coast and inland waterbodies.
Although not a comprehensive tax reform measure by any means, the proponents of the Chebeague “land bank” program believe their proposal could be integrated into any tax reform plan that is ultimately adopted.
The Chebeague proposal would begin with the Legislature but it could not be implemented without approval of Maine’s voters at referendum because it requires a change to the Constitution. The land bank program is a hybrid combination of Maine’s Tree Growth program and the restricted valuation system of the Proposition 13 proposal.
Specifically, any landowner in Maine could enroll his or her land, developed or undeveloped, into the land bank program. Once enrolled, the assessed value of the land would revert to its 1997 value and then be adjusted upward by no more than 2% annually. Development on the property would not be restricted, but when the land is eventually sold, Tree-growth-type penalties would be paid to the municipality. Depending on how long the land is enrolled in the program, the penalty at the time of sale would range from 30% to 20% of the difference between the market value of the property at the time of sale and the restricted assessed value. There would be no municipal reimbursement for the tax revenue loss associated with the restricted valuation, so the local property tax burden would shift under this proposal from households enrolled in the program to households not enrolled. Proponents of the plan suggest that after the program gets underway, municipalities would be made whole by virtue of the penalty revenue.
Saxl Commission. The most prominent of the legislative tax reform proposals is the set of recommendations developed by a commission appointed by Representative Mike Saxl (Portland). Rep. Saxl served as Speaker of the House of Representatives for the last two years but was “termed out” of continuing legislative service by Maine’s term limit law.
The commission’s membership (identified in a sidebar to this article) includes representatives of the business and academic communities, Maine Revenue Services, the legislature’s financial staff, former Governor Ken Curtis, and Speaker Saxl.
Although the property tax burden is the driving force behind the citizen initiatives, the plan the commission has developed focuses heavily on the income tax. Even the property tax relief proposed by the commission, provided largely by tripling the so-called “circuit breaker” program, infuses income testing into property taxation in a significant way.
Along with its heavy focus on the income tax, perhaps the other striking difference between this plan and the all the others is that the Saxl Commission, to its credit, squarely addresses the specifics of expanding the sales tax base, creating at the very least a starting point for that discussion.
The proposed expansion of the sales tax base, along with increased rates for the sales tax on restaurant meals and lodging, generates an additional $100 million annually, and with that additional revenue, the Saxl plan:
• Very significantly expands the “circuit breaker” program, opening up potential eligibility for property tax or rent rebate checks to households earning as much as $75,000 annually.
• Increases municipal revenue sharing by $17 million a year, targeting that revenue to a tweaked “Revenue Sharing II” distribution formula.
• Repeals the tax on personal property, reimbursing municipalities for 50% of their lost revenue.
• Establishes a refundable Earned Income Tax Credit (EITC) for lower-income workers that equals 30% of the federal EITC.
• Reduces the highest marginal income tax rate from 8.5% to 6.75%.
• Puts into motion more commissions, one to look at assessing a fee-for-service system for property tax exempt institutions, and another to develop incentives for more regionalization.
Eco-Eco. If the Saxl Commission was highly visible, the work the “Eco-Eco Smart Growth Forum” is more behind-the-scenes. The Forum itself boasts a deliberately informal membership system. Attendees to its periodic seminars on land-use issues include representatives of state agencies, legislators, real estate developers, business lobbyists, municipal land use planners, and interested citizens.
But the “Eco-Eco” tax reform plan wasn’t developed by this extended collection of interests. Instead, a small group of long-time “Eco-Eco” adherents developed the plan, which they promote has having no particular political or ideological bias. The underlying goal of the Eco-Eco plan is to change the tax policies in Maine that directly or indirectly contribute to the phenomenon of sprawl, which is land use development that occurs outside of or away from the state and local infrastructure that has been put in place to accommodate growth.
The Eco-Eco plan includes several elements that are similar to the recommendations of the Saxl commission. Income tax revenues would be cut 10% (approximately $100 million) by increasing the personal exemption to match the federal exemption level and simplifying the current rate structure into three brackets (2%, 4% and 8%) rather than the four rate brackets currently in place (2%, 4.5%, 7%, and 8.5%).
On the property tax side, the Eco-Eco plan would require the State to contribute a fixed share of the total cost of K-12 education, and that fixed share would be linked to the developing Essential Programs and Services (EPS) school funding model. The Eco-Eco education funding formula would also expose municipalities to some share of a Maine State Retirement System premium to cover the future costs of teachers’ retirement. The circuit breaker property tax and rent rebate program would be doubled in size under the Eco-Eco plan, rather than tripled in size as it would under the Saxl program. The property tax homestead exemption program would be significantly changed under the Eco-Eco proposal, although the details of this change were not completely worked out in time to be included in this article. The direction the group seems to be going would be to end the state reimbursement that keeps the current homestead exemption from resulting in a property tax increase to the non-homesteaders, but still allow (or potentially require) municipalities to provide the exemption without state reimbursement. The formula that distributes municipal revenue sharing would be modified under the Eco-Eco plan to move more of the revenue sharing pie toward the highest mill-rate communities.
On the sales tax side, and to pay for the income tax relief and increased spending in education, the Eco-Eco proponents would convert Maine’s sales and use tax into a gross receipts tax, which would be applied to the broadest possible range of business gross receipts. By converting to a gross receipts tax, the long list of sales tax exemptions and exclusions would evaporate, at least for the political moment. Compared to Maine’s very narrow sales tax base, a much broader range of economic activity would be exposed to a transaction tax. The wider base also allows Maine to shift to a proportionately lower rate. The Eco-Eco proponents suggest that the gross receipts tax rate could end up in the 2% - 3% range.
McGowan. Since he was elected to the Legislature in 2000, Representative Barney McGowan (Pittsfield) has been the spark plug for tax reform, firing away into a legislative engine that wasn’t getting the right fuel mixture to turn over. Now there is plenty of fuel going into the carburetor and Rep. McGowan is back, going for broke.
Municipal officials well remember the McGowan proposal that died in the Legislature on April 4, 2002, and the plan he is bringing forward this time is similar in design but bolder, from his perspective, more comprehensive and improved.
The centerpiece of the McGowan plan is a 4 mill property tax cap for education for all businesses and primary residential property, and a 12 mill cap for second or vacation homes. Like the Saxl proposal, the McGowan plan would also phase in the repeal of personal property taxes, reimbursing municipalities for 50% of the lost tax revenue. On the income tax side, the proposal would institute an automatic system to capture income tax revenue that comes into the state treasury at rates higher than the annual growth of total personal income, and dedicate that extra revenue to across-the-board income rate reduction.
The McGowan plan calls for two changes to Maine’s Constitution. The system of taxing different types of property at different rates requires a constitutional amendment. Also, the McGowan proposal calls for the creation of a special “Rainy Day” fund to make sure there will be sufficient revenue to support the state’s share of public education, and his proposal seeks to make sure that fund is protected by advancing a constitutional amendment to require a two-thirds “supermajority” vote of the Legislature to access that Education Budget Stabilization Fund.
Finally, the McGowan plan would present to the voters a choice about funding the property tax relief that is its centerpiece. Assuming the voters approve the entire plan in the first place by adopting the necessary constitutional changes, they would be given the choice of paying for the plan by increasing the sales tax rate by 2% or expanding the sales tax base according to a specific plan, and limiting any rate increase.
Conclusion. It appears at this point that several citizen initiatives will be presented to the Legislature in 2003 focused on comprehensive tax reform, and mixing with those proposals are several others that are being designed by legislators or interest groups to be advanced through the more traditional legislative process.
Originating in the state’s Constitution, there is a doctrine in Maine law that pertains to what the Legislature can do when presented with a valid citizen initiative. Specifically, the Constitution reads:
“The measure (citizen initiative) thus proposed, unless enacted without change by the Legislature at the session at which it is presented, shall be submitted to the electors together with any amended form, substitute, or recommendation of the Legislature, and in such manner that the people can choose between the competing measures or reject both.” (Maine Constitution, Article IV, Section 18)
In sum, this constitutional provision gives the Legislature just three choices when presented with a citizen initiative. It may adopt the initiative word-for-word. It may reject the initiative, therefore sending it out to the voters to decide at referendum. Or it may create alternative legislation addressing the same public policy matters that are the focus of the citizen initiative, and send that substitute legislation out on the ballot along with the initiated proposal as a “competing measure”. What the constitutional provision appears to restrict is the ability of the Legislature to unilaterally adopt an alternative plan without sending it out to the voters for competing consideration.
What is unusual this year, if not unprecedented in Maine, is that there very well could be multiple citizen initiatives that deal with the same general topic of tax reform and/or tax reduction. Although very different with regard to approach, there will be nothing to stop the voters from adopting all the citizen initiatives next November because they will appear on parallel ballots and will not directly compete against other. The challenge to the Legislature, therefore, will be to chart out a response to the several demands for tax relief and tax reform that is responsible, inclusive and compelling to the voters of this state. Failing that challenge, the voters will likely articulate their collective judgment on November 4, 2003.